North Dakota oil tax rate in middle of pack

BISMARCK – As lawmakers debate whether North Dakota’s oil taxes need tweaking, a recent study suggests the state sits in the middle of major oil-producing states when it comes to oil taxation.

By: Mike Nowatzki, INFORUM

BISMARCK – As lawmakers debate whether North Dakota’s oil taxes need tweaking, a recent study suggests the state sits in the middle of major oil-producing states when it comes to oil taxation.

The Republican-controlled Senate on Tuesday approved a bill that would reduce the state’s oil extraction tax rate from 6.5 to 4.5 percent, despite strong objections from Democrats who argue the tax cut is unnecessary.

The lower rate approved in Senate Bill 2336 would take effect for new oil wells drilled starting in 2017, or if the average statewide daily production exceeds 1 million barrels per day for three consecutive months, whichever comes first.

One Democrat, Sen. David O’Connell of Lansford, voted in favor of the extraction tax cut in a 34-13 vote on Tuesday.

A recent study commissioned by the state Department of Commerce calculated North Dakota’s effective tax rate on oil production at 9.8 percent, making it the fourth-lowest rate among the top eight oil-producing states in the fiscal year ending in June 2010, the most recent year for which comparable data was available.

The bill’s sponsor, Sen. Dwight Cook, R-Mandan, said the study looks at only one point in time, and today’s effective tax rate is closer to 10.6 percent. He highlighted a provision in the bill that would eliminate current price “triggers” that protect the oil industry with extraction tax exemptions and rate cuts if the price of oil dips below a certain threshold.

“The most important thing we need to do is decouple our tax rate from the price of oil,” he said.

Rod Backman, the former state budget director whose Covenant Consulting Group did the study, said there have been a number of comparisons of oil production and severance taxes among states. But while many other states or their local jurisdictions impose a property tax on oil-producing properties, North Dakota imposes a 5 percent oil-and-gas production tax in lieu of property taxes.

To reconcile the difference for comparison purposes, Backman divided the oil tax collections of each state by the value of their oil production to come up with an overall effective tax rate.

North Dakota’s rate of 9.8 percent ranked between Montana, at 10.7 percent, and Texas, at 7.9 percent.

Alaska had the highest rate, at 25.1 percent, while California had the lowest, at 2.5 percent. Without those two states, the average rate among the remaining six states was 9.8 percent, the same as North Dakota’s rate.

“Based on these major producing states that were included in the study, we’re about in the middle,” Backman said, adding that the study method doesn’t account for all the differences between states, and an exact comparison is virtually impossible.

Democrats warn the extraction tax cut will eventually cost the state billions. They point to a Legislative Council memo that projects the state will lose $595 million in oil extraction tax collections in the first five years alone, based on a Department of Mineral Resources projection of 1,750 new wells and an oil price of $80 per barrel, an estimate used in the governor’s budget for 2013-15.

Cook has called those projections a “generous assumption.” He counters that the bill also closes an extraction tax loophole for low-producing “stripper wells” in the Bakken and Three Forks formations, which he claims will generate an additional $500 million in oil taxes – a claim Democrats dispute because of the grandfathering of old stripper wells that produce less than 150 barrels per day.

Schneider said the claim that closing the loophole will offset the reduction in extraction tax revenue isn’t credible.

“Anyone who says so is either delusional or being deliberately misleading. No rational person could think this is a revenue-neutral bill,” he said.

Schneider said he hopes the bill receives more scrutiny in the House than it did in the Senate.

“Unfortunately, I think this bill is greased,” he said.

Cook said he fully expects the bill to pass and end up on the governor’s desk, calling it “sound tax policy for the future of our state.”

“I’m open to some common sense changes to it,” he said.

Oil tax rates compared

A comparison of effective oil tax rates in fiscal year 2010 of the top eight oil-producing states in the U.S. found that North Dakota had the fourth-lowest rate. Here is the ranking of the rates, with the total taxable value of oil production in each state in parentheses.

1. California 2.5 percent ($15.2 billion)

2. Oklahoma 6.7 percent ($11.1 billion)

3. Texas 7.9 percent ($49.4 billion)

4. North Dakota 9.8 percent ($6 billion)

5. Montana 10.7 percent ($2 billion)

6. Louisiana 10.9 percent ($8.6 billion)

7. Wyoming 13 percent ($8.3 billion)

8. Alaska 25.1 percent ($14 billion)

Source: Covenant Consulting Group study commissioned by the North Dakota Department of Commerce

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